Unit 2: Entity Tax Compliance

• Topic 01

  C Corporation Tax Compliance

  39 questions
• Topic 02

  S Corporation Tax Compliance

  24 questions
• Topic 03

  Partnership Tax Compliance

  30 questions
• Topic 04

  Multi-State Taxation

  27 questions
• Topic 05

  International Tax Compliance

  30 questions
• Topic 06

  Tax-Exempt Organisations

  15 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. Under §512(b), under what circumstances does rental income from real property become UBTI?

   • A
     When the tenant uses the property for commercial purposes rather than charitable purposes
   • B
     When the property is located outside the state where the organisation is incorporated
   • C
     When the real property is rented to a related party, the income becomes UBTI under the self-dealing rules
   • D
     When the real property is debt-financed (acquisition indebtedness exists), the proportional rental income becomes UBTI under §514
     Correct answer
   Explanation

   Under IRC § 512(b)(3), rents from real property are generally excluded from UBTI. However, two exceptions convert real property rents into UBTI: (1) Debt-financed income under § 514: if the property was acquired with acquisition indebtedness (e.g., a mortgage), the proportional share of rental income is UBTI; and (2) Rent from personal property exceeding 10% of total rent when personal property is rented in connection with real property. An exception exists: property substantially used (≥85%) for exempt purposes is not treated as debt-financed property.

2. Which Form 990 variant must all private foundations file regardless of their size or gross receipts?

   • A
     Form 990-T
   • B
     Form 990-PF (Return of Private Foundation)
     Correct answer
   • C
     Form 990-EZ
   • D
     Form 4720
   Explanation

   All private foundations must file Form 990-PF regardless of their size, gross receipts, or total assets. This is distinct from public charities, which use Form 990-N, 990-EZ, or 990 based on size thresholds. Private foundations face heightened scrutiny (five excise tax regimes under §§ 4941–4945), so the IRS requires a comprehensive dedicated return (990-PF) from all private foundations, even very small ones. Form 990-T is filed separately if the foundation has unrelated business income exceeding \$1,000.

3. Under §4958, what is the initial (first-tier) excise tax rate imposed on a disqualified person for an excess benefit transaction, and what is the rate if the excess benefit is not corrected?

   • A
     First-tier: 5% of the excess benefit on the manager; second-tier: 25% on the disqualified person
   • B
     First-tier: 21% (corporate rate) on the excess benefit; second-tier: 42% if uncorrected
   • C
     First-tier: 25% of the excess benefit; second-tier: 50% if uncorrected
   • D
     First-tier: 25% of the excess benefit; second-tier (if uncorrected within the taxable period): 200% of the excess benefit
     Correct answer
   Explanation

   Under IRC § 4958(a) and (b), the intermediate sanctions excise taxes are: First-tier: 25% of the excess benefit, imposed on the disqualified person. Second-tier: 200% of the excess benefit, imposed on the disqualified person if the excess benefit is not corrected (i.e., the disqualified person does not repay the excess plus interest to the organisation) within the 'taxable period' (generally before the IRS mails a notice of deficiency or the tax is assessed). Additionally, a separate 10% excise tax (max \$20,000 per transaction) is imposed on organisation managers who knowingly approved the transaction.